THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

TOM FOREMAN, HOST, THIS YEAR AT WAR: Yet as we look forward to 2008, there are signs of hope. We are bringing you the good and bad with the best team of foreign policy reporters on television. THIS YEAR AT WAR, right after we look at what's in the news right now. (NEWSBREAK)

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UNIDENTIFIED MALE: Stability.

UNIDENTIFIED MALE: Insurgency.

UNIDENTIFIED MALE: In Iraq.

UNIDENTIFIED FEMALE: The surge.

UNIDENTIFIED FEMALE: Heaviest fighting.

UNIDENTIFIED MALE: In Afghanistan.

UNIDENTIFIED MALE: Tribal area.

UNIDENTIFIED FEMALE: Violence in Gaza.

UNIDENTIFIED MALE: Iran's threat.

UNIDENTIFIED FEMALE: What comes next?

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FOREMAN: No other news organization on the planet covered THIS YEAR AT WAR like CNN. And so, as we look forward to 2008, we turn to all of those who know these stories best. The shocking assassination of Benazir Bhutto is a stunning blow to a crucial region. Nic Robertson and Barbara Starr will discuss Afghanistan and Pakistan. In Iraq, things are definitely better but will it last? We'll go to Arwa Damon and Jim Clancy for the future of a war at a tipping point. Iran is a mixed picture, a strong nuclear program but intriguing indications of maybe a willingness to cooperate. Aneesh Raman and Zain Verjee look at what negotiations or bunker buster bombs are in there. And this year saw few major terrorist strikes, but was that just luck? We'll ask Paula Newton and Kelli Arena whether terrorism will return in 2008. Negotiations have become between Israel and the Palestinians but are both sides really too weak right now to create a real deal? Ben Wedeman and Jim Clancy on the outlook for Middle East peace. And here in Washington, the battle between the White House and Congress led to few if any real results. Bill Schneider and Ed Henry will tell us if there is any hope for an end to gridlock in 2008. The best reporters in the business look forward to 2008 in a special program THIS YEAR AT WAR.

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BENAZIR BHUTTO, DECEASED FMR PAKISTAN PRIME MINISTER: I am taking the risk and facing the dangers in my country because I believe that all the children of Pakistan are as dear as my own children.

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FOREMAN: And that risk hit home late this week as an assassin struck down former Pakistani Prime Minister Benazir Bhutto. We're in Atlanta to update our year end discussion of the year at war because of the significance of this tragic death on both nuclear armed Pakistan and neighboring Afghanistan where thousand of U.S. are battling al Qaeda and the Taliban. Joining me, CNN senior international correspondent, Nic Robertson is in Switzerland. Pentagon correspondent, Barbara Starr is as always at her post there. And John Vause is in Karachi of Pakistan. John, let me start with you. We have heard so much reporting on the details over the weekend of what happened. Let's look at the big picture right now. On the ground in Pakistan right now, is there a sense of whether or not stability can emerge from the other side of all this chaos?

JOHN VAUSE, KARACHI, PAKISTAN: Well, to be really honest, Tom, right now that's just too difficult to tell. This could go one of so many different ways. If these elections go ahead, will that could be seen as way of democracy, that parties could boycott that if Musharraf imposes some kind of emergency rule as some speculated he will. Then, obviously, that would be a blow to democracy. But you know, if elections are held will they have credibility with people of Pakistan? Already, one major political party said that they will boycott elections on January 8. So, at this stage in the wake of Benazir Bhutto's assassination, it's just too difficult to tell what is actually going to happen in the coming weeks and months.

FOREMAN: And Barbara, at the Pentagon there is very much a sense that while there is a great plan in place, seemingly a great plan to bring Bhutto in to pair her up with President Musharraf and create a coalition, now all of that is out the window obviously and as you put it, there are no good options right now.

BARBARA STARR, PENTAGON CORRESPONDENT: There are no good options for the U.S. military, for the Bush administration in Pakistan. Tom, they are walking a delicate dance right now between the Musharraf government, between Mrs. Bhutto's supporters and other political parties in Pakistan and still trying to battle al Qaeda and other extremist elements in the country. It's - there are just no good options and no one right now sees a clear way ahead.

FOREMAN: Let's take a look at the time line of the year and how we reached this point. Way back in March, the chief justice there was suspended by President Musharraf and that enraged democratic activists in Pakistan. In July, the red mosque was stormed. Dozens, maybe hundreds of Islamic radicals were killed there. That enraged Islamic fundamentalists. In October, Bhutto returned as part of a political deal that had been largely brokered by the United States. There was an assassination attempt during her return well, which she escaped. In November, President Musharraf declared state of emergency. And by December, of course, as we now know, Bhutto was assassinated. Nic, when you look at that year before us, does that look like prelude to an even worse year coming up with this punctuation mark at the end or as John said at the beginning, just simply all up in the air right now?

NIC ROBERTSON, SENIOR INTERNATIONAL CORRESPONDENT: It's up in the air. But the overall trajectory is not a good one for Pakistan; it's not a good one either for Afghanistan because anything that destabilizes Pakistan will ultimately destabilize Afghanistan. It's not a good outlook for the 2008 for the United States that has so much at stake in Pakistan and Afghanistan. And for the Pakistani people it is, it is a moment of real uncertainty. But the trajectory over the year is a negative one and shows a strengthening radical Islamic element vibrant in Pakistan. Tom?

FOREMAN: Barbara, with the concern for all the U.S. troops who are in Afghanistan now and the situation there right now, the Pentagon as I understand it from your reporting is looking very hard at the general whom President Musharraf appointed as the head of the army, as maybe being a force that can be relied on in the midst of this turmoil?

STARR: Well, you know, within hours of this happening there was a lot of talk here about this man -- General Ashfaq Kayani. He is the new head of the Pakistani army and it is the Pakistani army indeed that basically controls the country that is the major security force in Pakistan. Even before the assassination of Mrs. Bhutto, key U.S. military commanders reached out to General Kayani trying to deal with him, that he is a man they think they can do business with to get the Pakistani army much more in the mode of counterinsurgency, getting out in the field, going after al Qaeda, going after extremist groups. This is what the U.S. wants to see happen. They know that Pakistan has become a growing safe haven for al Qaeda. And they think that Pakistani army has to be the force to really deal with that.

FOREMAN: And yet, John, on the ground there -- I would think the army has to tread somewhat lightly at this point?

VAUSE: Very much so. For the army, this a very difficult situation and it is the most respected institution in this country. And in many ways their popularity is slipping along with the popularity of President Musharraf. He may have stepped down as general, but he is still living in the Rawalpindi Garrison House. He still really hasn't cut all his ties with the military. So, in many ways, as his popularity dies in this country, he's dragging the army down with it.

FOREMAN: Nic, one of the concerns from the Pentagon and from U.S. officials was that the military should not be seen as utterly, overtly just taking over the running of everything and should be the police forces, security forces trying to secure things. Why would that matter at this point?

ROBERTSON: It would matter because it's a matter of public perception in Pakistan that people can put their faith in the military -- that they are independent, independent of the political process, though they very much want to be part of the political solution in Pakistan and important for Pakistan's international image. One senior Pakistani general that did go for counterterrorism training in the United States who was a key figure in the northwest frontier province where so many these radical Islamic elements are getting stronger, when he returned from that training, he was posted by the government, by the military to some where completely different in Pakistan without, that doesn't have relevance for his counterterrorism training in the U.S., that it acts like that undermine confidence in the direction of the army is going in Pakistan, Tom?

FOREMAN: Very briefly, John, what do we need to see in the next of couple of weeks to make the situation get better there? What would be the biggest sign or the thing we are looking for?

VAUSE: Well, I think what we already seeing at the end of the week when we saw the army on the street taking control, stopping the rioting, stopping the looting, reassuring words coming from the government that the elections will take place on January 8. We're still waiting to see if that will in fact be the case. But essentially trying to restore calm, trying to restore order while trying to make the moves at least in a very public way. Trying to make this moves back towards the democratic process. If that continues, then just maybe, just maybe things will improve here.

FOREMAN: And Barbara, quickly if you can, what about the question of the nukes. Pakistan does have nuclear weapons. Is there a sense now from the Pentagon that they are secure?

STARR: Officially, it's always the same answer as John; officially the nuclear weapons are secure. The most loyal elements of the Pakistani army are in charge of them. But with the instability in Pakistan, if General Musharraf were to fall from power of leading the government, all bets could be off. There is a good deal of concern.

FOREMAN: Thank you very much, Barbara, Nic, and John as well. Next, a look at Iraq whereas Jim Clancy reported, 2007 brought at least a glimmer of hope to a war-weary population.

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JIM CLANCY, CNN CORRESPONDENT: Iraqis, weary of sectarian strive argue all of the militias are out of control. Some hope just as al Qaeda lost its support, the militias too will see their safe havens disappear, whether they're in sectarian strongholds or the government.

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(BEGIN VIDEO CLIP) ARWA DAMON, CNN INTERNATIONAL CORRESPONDENT: Back in January, some of the heaviest fighting for the battles of Haifa was concentrated right in this area. Walking through here would have been unimaginable.

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FOREMAN: And to walk us through these dramatic, dramatic changes in Iraq this year, Arwa Damon now joins us from London and CNN international anchor, Jim Clancy is in our Atlanta bureau. And Arwa, with you in London there, I can't help but think of dickens when I think of Iraq. This was the best of years and the worst of years all at once, wasn't it?

DAMON: It really has been. I mean, it's kind of impossible to try to condense everything that has happened over the last year into such a brief amount of time. But it's been such a rollercoaster. There have been such difficult times. There are al Qaeda strongholds throughout the entire country. Then you have the U.S. military surge. Relative stability and I say relative brought to certain places. And so for a lot of the U.S. soldiers, they look at it in terms of military progress. For the Iraqi people though, it does remain an entirely different story -- cautious optimism going into 2008 and a lot of apprehension among some that maybe the worst is yet to come.

FOREMAN: Let's take a look at the time line if we can quickly. In January, the president announced his idea of a surge. A lot more troops going in to help out. In May, we have what was called the awakening in Anbar province where more Sunni tribal leaders said they would work with the military and against al Qaeda to calm things down. That started spreading. Also in May, there's a showdown in Congress over the future of the surge and funding where it was going next. By September, General Petraeus was back reporting on the progress of the surge and what was actually happening on the ground there. And then by the year's end, almost undeniably, a real payoff from this surge, at least in a military sense. The number of deaths way down. Now, Jim, how can that be built on in 2008?

CLANCY: Well, that is the big question. But they're working on it. You know, one of the things that they're analyzing right now is the success story really of 2007. What was it? It was al Qaeda overplaying their hand. Al Qaeda suddenly lost their safe havens. They lost their ability to import the suicide bombers; their networks were uncovered. How much cash they had was uncovered. And there is the worrying part of it. Al Qaeda could be poised to make a comeback if they're not really kept down on the mat in the words of General Petraeus. You know, when you look at Iraq and you ask what goes forward here? You have to get the Iraqi government to move towards reconciliation, bringing the Sunni volunteers into security services, trying to bring the country back together again. There's a lack of progress on the Iraqi political front. That's where the U.S. has to take advantage of its current gains on the battlefield and put it to work in the political sphere.

FOREMAN: You mention the gains on the battlefield. Let's look at the graphic that shows a number of U.S. troop deaths in this country where we have so much going on, very encouraging to an awful lot of people. If you look at the numbers back in 2003, up, up, that went to 2004, 2005. But look at this, all the way down here at the end of 2007, only about 37 U.S. troops killed, 740 Iraqi civilians killed in October. That's still an awful lot of people, Arwa, but is that close enough for people to be saying, maybe this is the tipping point where it can keep coming down and come under control?

DAMON: Look, Tom, there is of course the hope that it's going to keep decreasing, that there will be stability in the country but here is the reality of it. It's neither black nor white. People can't say completely with certainty that they are optimistic for the future. There are those that are recognizing certain gains that have been made. But there still is this very real underlying fear that things will just go back to the way they were when they were at their worst. People, even though they do feel safer than they did a few months ago, still continue to live in fear. And then, there are still the psychological problems that the country as a whole has to overcome. And that's without even beginning to address everyone's pretty much number one concern and that is this current government. That it is entirely and fully ineffective and many people will tell you that until that government starts acting, starts carrying out national- level, national reconciliation, the entire nation won't be able to move forward, no matter what levels of violence there are.

FOREMAN: Jim, one of the issues that has come up, basically the price of oil has risen so high that it's created an opportunity for great wealth for a lot of people and that some people in Iraq seem to see that. Sunnis, Shia, Kurds and saying maybe we ought to keep things calmed down because we could all do pretty well if we did.

CLANCY: You know, I talked to one of the leading diplomats on Iraq, a U.S. diplomat. He told me that he was ordering everything book he could get from Amazon.com on Tamani Hall. Corruption in Iraq is what some Iraqis say is our second form of terrorism. It's endemic in the entire system and particularly there in the oil sector. You know, I have been going to Iraq for more than 20 years and it's always been this place of fear. Then, it was fear of Saddam Hussein. Today, it's probably fear of militias. It is fear of the car bombs. It is fear of being caught in the crossfire as the various political factions are literally going at each other's throats.

FOREMAN: Well, Jim, is there any hope of overcoming that corruption because, it's been reported on so much?

CLANCY: Well, they're looking for a way. That's why -- they're looking to Tamani Hall. How do they take Tamani Hall? Maybe that will work in Iraq. Let me tell you, this is a question that's stumping everyone. It's always been there. Getting rid of it is going to be a huge challenge.

FOREMAN: We'll see if we are up to it in the year coming. Jim and Arwa, thanks so much for that report.

Coming up: Kelli Arena on the war on terror. But straight ahead -

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ANEESH RAMAN, CNN INTERNATIONAL CORRESPONDENT: Sir, as you might know, there is a discussion in the U.S. about whether to engage directly with Iran. If there were no preconditions, would you be willing to sit down with the U.S. president or perhaps at a foreign ministry level to discuss everything that the U.S. questions on the nuclear program; Iran questions on sanctions. Would you be willing for direct talks without preconditions?

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ZAIN VERJEE, CNN STATE DEPARTMENT CORRESPONDENT: Here at the State Department, they say diplomatic efforts against Iran are going to continue full force.

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FOREMAN: And now to discuss these very contentious relations between the U.S. and Iran, we have CNN State Department correspondent, Zain Verjee with us and in Cairo, Aneesh Raman who's probably spent more time in Iran this year than any other broadcast journalist. So, let me start with you, Aneesh. In the coming year, should we expect stepped up or stepped down confrontations with Iran?

RAMAN: Well from the Iranian side things couldn't be going better. They've ended this year, far better than they began. That NIE report, National Intelligence Estimate really changed everything internally and externally. The two things to look for in 2008 -- one, Iran's relationship with Russia. That has really been the backbone of Iran's new found confidence that it won't face any more sanctions at the U.N. Security Council. Does that stay? They're jointly building a nuclear power plant. Does that go forward next year? All of that has to be watched. The other thing internally, March parliamentary elections. That is being seen as a referendum on Iran's president. Does he suffer because now with tensions coming down, do Iranians look to a lagging economy or with President Bush maintaining his stance that Iran's a threat, does that help Ahmadinejad? So, those are the two things to look for on '08 to gauge where this heads next.

FOREMAN: President Mahmoud Ahmadinejad, key to almost everything there as Aneesh mentioned. And let's look at the time line that he refers there. Back in February, the nuclear watch dog agency for the U.N. said that Iran in fact had not shut down its nuclear program as demanded. At the same time, the United States was accusing Iran of having a much greater role of sending weapon and support into Iraq to disrupt things there. By April, Iran was saying that it had stepped up its nuclear development enriching uranium to what they called an industrial scale. In October, after two different sets of international sanctions seemed to have no effect on this, the United States said it would launch its own unilateral hits against Iran in economic terms. And then in December, came out the NIE report, National Intelligence Estimate which said back in 2003, Iran had really shut down its nuclear weapons program in part because of international pressure. Zain, this seems like a back and forth all year. One moment Iran saying we're moving forward for only for peaceful power, the next minute, indications maybe there is something else involved. What does the State Department make of this?

VERJEE: Well, the sense really is from the U.S. side is that the State Department has been a little bit schizophrenic on the way it approaches Iran. On the one hand, you know, tightening the screws with things like sanctions, increased pressure on Iran, sanctions on the Iranian Revolutionary Guard Corps, unilateral sanctions from the United States on Iran saying, you know, we don't want to do business with any banks and the rest of the world to do business. On the other hand, the U.S. is flirting a little bit with Iran, holding face to face talks with the Iranians about Iraq in Iraq. So, they know that they need the Iranians but the U.S. is really playing both sides, carrot and stick and hoping that that will help push the Iranians in some way to the table. But it's very difficult to assess whether that strategy will be successful.

FOREMAN: Aneesh there does seem to be some kind of back room movement on all of this because late in the year, these little - just little feelers out there indicating that perhaps Iran is backing away from Iraq a little bit.

RAMAN: Yes, we've seen that in terms of at least evidence of the decline in attacks. Although U.S. military personnel say, they haven't noticed a dramatic drop in terms of what they say is Iranian influence Iraq just yet. But in the broader sense, you know, this is a moment Iran seems keen to see is following the NIE report, we saw at the latest press conference, you know, the end of the year that I was at, the third I've attended with the Iranian president, markedly subdued tone. He was remarkably conciliatory; he was given a number of opportunities. Baited by journalists to rally around the west, he chose not to. So, either of his own accord or direction of the supreme leader, Iran is starting to tone down the rhetoric on each side as well. After that report, a cascade of events in the region. For the first time, an Iranian president attended a gathering of the Sunni Arab states, the JCC. For the first time an Iranian president was unofficially invited to attend the Haj in Saudi Arabia. For the first time, Iran is really speaking of broad cooperation with U.S. allies, Sunni Arab states in the Middle East. So, Iran doesn't see itself as rising anymore but sees itself as having arrived and starting to act accordingly, Tom.

FOREMAN: And is that a sense that the State Department sees the crest of this regional growth of power for Iran has now been reached and is either stabilizing or falling off?

VERJEE: Well, regardless of how they see it. When you talk to different people at the State Department the bottom line is, they do see Iran's still very much as a destabilizing force in the region that compromises the U.S. agenda for the Middle East and the goals of the president has said wanted to see.

FOREMAN: Just because power has been able to get together? VERJEE: Because of the power, but also, because they back and support groups like Hamas, like Islamic Jihad, Hezbollah, the U.S. says these are all terrorists. And they do have a very influential role in Iraq because as you know now, it may have diminished or minimized it of late but it's still there and they can use it as leverage. So, from the U.S. point of view, Iran, Iran, Iran is going to be still the key word for 2008. And it's still viewed as a problem.

FOREMAN: And Aneesh, how much do you think Mahmoud Ahmadinejad really is feeling the pressure now? You mention the referendum coming up on him. He's got serious economic troubles and he has been criticized very strongly by opponents in Iran saying, you've been so busy with all this international stuff, you have not taken care of business at home?

RAMAN: Well, it's interesting. I was there in and around this report being released. Leading up to it, there was remarkable growing criticism within Iran about the president, about his tactics. There is a uniform support for Iran's right to nuclear energy. But moderates, reformists have said, look, the president's statements have added to the fear over Iran's intentions. That all really quieted down after President Bush following the NIE report didn't change his stance at all. For Iran now, Ahmadinejad is able to sell this to his base as well as others that it's personal. It's about President Bush and Iran, that he has to stand firm against President Bush. So, that could help him in March's elections, the reformists are already calling for free and fair elections, they're cautious about what might happen. At the moment, it looks like his supporters may do well because President Bush hasn't changed his stance. But it's again, you know, up in the air. And we'll have to wait and see what happens.

FOREMAN: We will see. Aneesh, Zain, thanks so much for being here. Straight ahead -- the war on terror, 2007 was a year where we all learned that al Qaeda was more powerful in many countries than we ever thought before. One example, North Africa.

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PAULA NEWTON, CNN INTERNATIONAL CORRESPONDENT: This spring, militants released this stunning video, a step by step, show-and-tell of how suicide bombers prepared for another devastating attack that killed 33 people in Algiers on April 11. It is also the handiwork of al Qaeda to turn and to create an Islamic state in North Africa now infused with hundreds of battle hardened Algerian guerilla fighters and emboldened by its branding and tactics.

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PAULA NEWTON, CNN CORRESPONDENT: Investigators will now take the car away to continue to sweep it for any kind of forensic evidence that would give them more clues into this alleged plot.

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FOREMAN: That was CNN's international security correspondent Paula Newton at the scene of attempted car bombing in central London, one of this year's successful anti-terrorist operations. Paula joins us from our London bureau. With me in Washington is Justice Department correspondent Kelli Arena.

And Paula when we look back on this year there wasn't a lot of successful terrorist activity. Do the world's anti-terrorist groups say, "We were lucky" or "We are getting good at this"?

NEWTON: I would definitely not say they're getting good at this. They still have a lot of sleepless nights, Tom. And the reason is because of the plot you were just talking about. That became known as "The Doctor's Plot." It really was spectacular a day later when they tried to ram and bomb Glasgow Airport. That kind of incident underscores the kind of structure that these cells are taking on now. No it is not the huge spectacular attack from 9/11. They feel that right now what they are looking at are smaller cells, whose ambitions are quite not what they used to be. Of course, al Qaeda would still like to have a major attack. They feel they would have more success though with this kind of a plot. What is so scary with that kind of a plot is that it comes out of nowhere. Tom, the authorities admit to everyone. They had no idea this was going to happen.

FOREMAN: Let's take a look, Kelli, the map here, we'll zoom in and show where that happened in Glasgow. And I can't help but think domestically this is the very same thing justice authorities worry about. Not a giant plot, but three, four people doing something.

KELLI ARENA, CNN CORRESPONDENT: That's right. But that's really all it takes. It doesn't take a whole lot of money or a whole lot of people to do some major damage. And as Paula mentioned, these were, were people who were part of the society who went undetected. And that is something that we have heard repeatedly from U.S. officials that they're very worried about extremists who may already be here, sympathizing with groups like al Qaeda who could someday be provoked to, to take action.

FOREMAN: And yet, when we look at the time line for the past year there weren't a lot of big high points in the year. There were five people found guilty in London of plotting a bombing there back in April. Then in June, we had the Glasgow Airport attacks that we are talking about there. In July, a report said that al Qaeda in Pakistan was resurgent, getting its legs back underneath it to do something more damage.

And in October, an awful lot of rumble about how we are handling the people we capture. We all learned the word "waterboarding" and then in December we had these attacks in Algeria.

Nonetheless, Paula, you look at that. That's a pretty good year.

NEWTON: And yet the security authorities we speak to here in Europe and I'm sure the United States was concurrent, no it hasn't been a good year. What they've learned about is exactly how al Qaeda is regrouping. And I have been sitting in trials here in Britain. And we had a terror plot here broken up in Germany in September that was targeting U.S. soldiers and their families and that kind of car bombing plot apparently came fairly close to being able to work.

The key, the linchpin there, Tom, is that these were European militants who had traveled to Pakistan to get expertise and then traveled back to Europe. It is something that still worries U.S. authorities about people with European passports not only plotting attacks in Europe but also planning those kinds of attacks in the United States.

FOREMAN: Kelli, we are such a mobile world these days. What are the authorities here going to be looking for most in 2008 in terms of trying to find these plots? They can't just stand by and say "We can't find them." What are they doing?

ARENA: Well, they're continuing to strengthen the relationships with various communities within the United States. That they do get a heads up if something is out of the ordinary or peculiar. Obviously keeping a real -- taking a real hard look at Pakistan and those tribal areas because as we heard in the National Intelligence Estimate, those areas are where al Qaeda has been able to regroup.

FOREMAN: So, sort of the nightmare scenario for them would be like a German citizen with a tie to the region or an English citizen, who travels there or communicates there and then comes here.

ARENA: Comes to the United States. Assimilates well into our community. Goes unnoticed. Not necessarily someone that law enforcement may look at twice if they came into the country. They don't need visas. So lots of concern about extremists.

FOREMAN: At the same time you have to look entirely at domestic terrorism like Oklahoma City which could always rise again.

ARENA: And the Internet is a big part of that. Because you have seen a rise in extremist Web sites. And that propaganda is being spread more easily than ever before.

FOREMAN: Paula -- you said that they wouldn't say this is a great year, that they're not getting necessarily good at it. What do they feel like they have to get much better at for us as a world to start sleeping a little better and saying "these attacks will become more and more rare"?

NEWTON: Unfortunately what they're looking at is this is a long- term problem. And I know you hear that over and over again and might be a cliche. But here in Europe they're looking at their Muslim communities and seeing what they have to do. We had head of MI5 here, the intelligence agency say recently quite candidly that the recruiting is going on on the Internet just like Kelli says, with young children, children as young as eight. What they need to do is get into these communities and decide what is radicalizing the youth and are those the potential terrorists of tomorrow. They're trying really to hold off that kind of a development.

The problem though, Tom, that we hear again over and over again is what the concept of blowback. That Iraq, Afghanistan, the campaigns there and also Guantanamo Bay, are backfiring. What they're doing is really being tools of recruitment. Very, very important tools of recruitment for those people who want to try and recruit. Those suicide bombers here in Europe.

FOREMAN: And very briefly, Kelli, that's the problem here too?

ARENA: Very much an ideological war, it's a war of ideas, Tom. And especially as Paula said when you get to the youth here in the United States who have felt a lot of that negativity. Coming at them from the community because they're Arab American or Muslim. It's getting a hold of those kids and making sure that they do not become isolated.

FOREMAN: Thank you very much, Kelli and Paula, both.

Much more to come on THIS YEAR AT WAR. Straight ahead -- the very slim chances for peace in the Middle East. Listen to Atika Shubert's report from Israel.

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ATIKA SHUBERT, CNN CORRESPONDENT (voice-over): A rocket hits this town almost every day. And residents here say it is like playing Russian roulette just to live here. You never know when or where a rocket is going to hit. With the increasing violence in Gaza, the number of rocket attacks is also on the rise and that increases the odds of something like this happening again.

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BEN WEDEMAN, CNN CORRESPONDENT: This is a taste of the mayhem to come. Fatah is now taking revenge on Hamas, destroying everything it can. Burning their offices, killing their members.

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FOREMAN: That was CNN's Ben Wedeman reporting on the infighting that split the Palestinian movement in 2007. But may paradoxically have led to the chance for peace there.

Ben joins us from Jerusalem now and once again in Atlanta, CNN International anchor, Jim Clancy. Ben, this year did we move closer or further away from peace in terms of the Israelis and the Palestinians?

WEDEMAN: Well it is really hard to say, Tom. On one hand the Annapolis summit did take place, and that was really the first substantive peace talks for the Middle East in seven years. On the other hand, the Palestinians are more divided than ever. And there are no signs that the split that became so dramatic last year or rather in May will be in any way remedied. That it does appear that if anything in 2008, Hamas and Fatah, the two main Palestinian factions are going to be fighting if anything even more.

FOREMAN: Let's take a look at the time line you are referring to, Ben, as to how that happened. In February, Saudi Arabia brought these two factions together. Fatah and Hamas, the leaders of the Palestinians, to make a coalition government to hopefully get along with things. By May, the competition between the groups had erupted once again. Street fighting in the Gaza Strip. In June, Mahmoud Abbas dissolved this unity government and he threw Hamas out even as Fatah was driven out of Gaza.

U.S. and Israel recognized Fatah, started giving financial aid to them. That obviously wasn't appreciated by the folks in Hamas. And then in November, the Annapolis summit there.

So Jim, when we look at these different factions within the Palestinians. Will one win or will they make a deal, Fatah and Hamas?

CLANCY: Well, Fatah says it is not going to make any deals. It is in the driver's seat in terms of international aid. It is going to enjoy that. It is hoping that it can have the Palestinian people look on Fatah and say this is the one we have to come to if we want to get financial aid, if we want to get health care for our children, all of those kind of things. But the deep divisions don't satisfy the Palestinian people. You know they didn't vote Fatah out of office because they like the radical militancy of Hamas. They voted them out because they didn't like the way they were running things and they didn't feel they were honest and they felt they hadn't really delivered on all of their promises. Today you have a Palestinian society that has been atomized by this entire conflict. And for how long it has gone on.

There is two competing ideologies here, and neither side looks like they'll back down.

FOREMAN: Let's take a look at the map if we can, very quickly, Ben. As we zoom in here we'll remind people what we are talking about. This is the West Bank over here. Gaza over here. Generally, Fatah is in charge over here. And over here we have Hamas.

What do you think, Ben, is there any ways the groups can start reconciling their problems in this coming year?

WEDEMAN: Well, Tom, there's a lot of pressure from a variety of directions for some sort of reconciliation. On the one hand, ordinary Palestinians, most people you speak with in the streets of Gaza City, Ramallah, Nablus, wherever, will tell you that they don't like the split, that they really want to see the factions bury the hatchet and get on with the business of creating a Palestinian state. There are other Arab states, like Egypt and Saudi Arabia, which have been trying to encourage the factions to resume some sort of dialogue.

But on the other hand you have the United States and Israel which adamantly support Fatah and are very much opposed to Hamas. And as long as the two key critical powers in this game are taking that position, it's very unlikely that any leader of Fatah, for instance, Mahmoud Abbas, or others would be willing to risk their American and Israeli support to initiate some sort of dialogue with an uncertain outcome with Hamas at this point. Tom?

FOREMAN: Jim, there seems so many times that Americans want to throw their hand up and say, "I don't understand it. We can't fix it." Why does it remain so important for the United States to remain involved in the process of getting peace between the Palestinians and the Israelis?

CLANCY: Well, one of the frustrating things about all of this has been how long it has taken the Bush administration to really wade into this one. Yes, they're in there now. Yes, they say they're going to talk about a final agreement and they want to see a deadline by the end of the year. Nobody expects the deadline to be met.

George Bush seems to be realizing finally that if he has got a war on terror, this is the issue, the Palestinian-Israeli issue. The U.S. has to help bring this to a conclusion. It is used as the golden recruitment tool of al Qaeda, of radical Islam around the world and the U.S. has to be seen to be doing something about it, Tom. It's as simple as that.

FOREMAN: Many thanks, Jim, and Ben as well. Straight ahead, politics and the issues of war and peace have taken some strange turns here in Washington, DC.

(COMMERCIAL BREAK)

FOREMAN: We have been doing timelines all throughout the show. But we don't have one for the political war of words between Congress and the White House, because frankly almost nothing happened in 2007.

To explain why we turn to two best of the political team on television, senior political analyst Bill Schneider and White House correspondent Ed Henry. And Ed, let me start with you. I would think that the White House in some ways would say nothing happening on the war this year was good for them. Because it meant they didn't have to back down from it.

ED HENRY, CNN CORRESPONDENT: Well, certainly they actually do feel that some things happened this year. One is that the Democrats on the Hill kept trying to change the direction of the war and couldn't, in large part the White House believes, because facts on the ground changed in Iraq. And obviously they want to give credit here at the end of the year to the president. Because if you remember back in January, he announced the so-called surge strategy. Increasing the number of U.S. troops on the ground in Iraq. And the fact is as we close the year there have been security gains. But there is still a challenge in the new year for the president. The fact that the other goal of the surge, reconciliation among the Iraqi government has not really worked.

FOREMAN: Bill Schneider, this had to be a frustrating year for the congressional Democrats in relation to the war in Iraq.

BILL SCHNEIDER, CNN POLITICAL ANALYST: Yes it was, and for voters who voted Democratic. Because they believed they put a Democratic majority in Congress in 2006 to stop the war. And they didn't do it. Which is one reason why ratings for the Democratic Congress are so low. In some polls lower than the ratings for President Bush.

Why couldn't they do it? Primarily because the Republicans held fast. The minority particularly in the Senate held fast behind the president's Iraq policy. They didn't crack. And the Democratic majority just isn't big enough. Another reason, of course, which we don't hear from liberals, the Democrats didn't have the nerve to cut off funding for the war. Something they might have been able to do but they didn't have the nerve to do it.

FOREMAN: Ed, there had to be a sense at the White House, too, that the events on the ground by year's end really were going in their favor. People may analyze it all they want. But everything we have seen here is that the surge has worked. Iraq is much better off now than it was six months ago for all of its problems.

HENRY: That's right. In fact I have heard some people in the administration tell me privately they thought that General David Petraeus should have been "Time's" person of the year, not Russian President Putin. They feel that David Petraeus on the ground, the commander on the ground that President Bush referred to all year really turned this both in Iraq but then also the dramatic testimony you remember in the fall on Capitol Hill, really selling this to the Congress and the public that things had in fact changed, Tom.

FOREMAN: What are the Democrats supposed to do about this now, Bill? The election is coming into the fore, here. You made the point the public has made up their mind about this war -- but the progress on the war certainly seems like it might take it off the playing field for the election itself?

SCHNEIDER: Well, at the moment in the primary campaign politicians aren't talking about it. Democrats don't want to talk about any kind of gains being made on security. They will say, there has been no gains on political reconciliation. And Republicans are still wary of wrapping themselves too tightly around President Bush's policy.

So the interesting thing is it is not being widely discussed on the campaign trail. But it will be. Once you have a Democratic and a Republican nominee you are going to get a debate that will sound something like this.

Democrats will warn if we stay in Iraq any longer, it will endanger the security of the United States. Because it will be an -- a tool for recruiting Islamic radicals and terrorists.

Republicans will say, if we get out of Iraq too quickly, it will endanger the security of the United States because it will create a base for terrorists who want to attack the United States. That will be an interesting and important debate.

FOREMAN: So, Ed, what is the conversation in the hallways of the White House? They know somebody will be sitting there end of the next election. As the year goes forward, what kind of challenges do they think the next president will face with this war?

HENRY: Well, the fact of the matter the White House feels in the hallways privately that the whole conversation has changed. In that the president months ago said he believes there should be a long term U.S. presence in Iraq. A lot of Democrats scoffed. But if you think about it, some of the Democratic presidential debates, people like Senator Clinton and Senator Obama, have acknowledged a long term U.S. presence in Iraq.

The question of course will be how big of a presence? But the White House is starting to feel good at least Democrats at least are admitting there needs to be a long term presence and they also feel that heading into the next election, though they won't frame it this way, that the president should be in a place to start bringing more and more U.S. troops home this coming year. The question of course, how many of them? And it is something the White House is going to have to deal with big time in '08.

FOREMAN: Thanks very much Bill and Ed as well. When we come back, we'll talk about the cost, the terrible human cost of THIS YEAR AT WAR. Please stay with us.

(COMMERCIAL BREAK)

FOREMAN: For all the progress we've talked about in this war in recent months, something that we should never forget is this. More U.S. troops died in Iraq in 2007 than in any other year in this war. Every week we have shown you the faces, those who will never return to their grieving family and friends all across our nation.

It is our hope that at some point in 2008, we will have a week, maybe many weeks where no faces will be added to this gallery of our heroes. That's not really our expectation. But it is our hope.

So for one last time in 2007, we hope you will join us to salute some of our fellow Americans who fell in THIS YEAR AT WAR.

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